Selling in a Downturn to a Single Bidder–at Maximum Value
Faced with a slowing economy, corporate buyers will increasingly turn to unsolicited acquisition offers to fulfill strategic objectives. Armed with cash and eying attractive buying opportunities, forward-looking corporations are now pinpointing potential acquisition targets that fill specific corporate needs and will help restart growth. For many prospective sellers now may surprisingly be an advisable time to sell, provided the offer reasonably reflects the strategic benefits of the proposed acquisition. But given that prospective sellers will be hard pressed to attract competitive bidders, it is all the more important to employ best practices that will help maintain control of the sale process and maximize transaction value when faced with an unsolicited acquisition offer.
Now is a good time to buy
There is no denying that volatility and lack of visibility has caused even the most hearty corporate development strategists to curtail acquisition activity. But with the new administration’s stimulus plan taking shape and some semblance of order returning to credit markets, corporate buyers and their strategy consultants are beginning to sense that now may be the time to take advantage of a historically unique buying opportunity.
Supporting this prediction is research by Boston Consulting Group showing that acquisitions during economic downturns have a higher chance of creating value for buyers than acquisitions during economic upturns. In fact, downturn deals are twice as likely to create long-term returns above 50 percent. These higher returns are not simply driven by buying at low valuations, but also result from successful acquisition practices such as extending financial resources to a capital-constrained company, improving operational performance, and gaining strategic and financial benefits from the business combination.
Corporate balance sheets currently hold historically high levels of cash, an attractive currency in today’s de-leveraging environment. As of December 2008, the S&P 500 companies held $1.2 trillion in cash and equivalents, which is 62% higher in constant dollars than the level in 2000, the height of the last M&A bubble.
The collapse of the IPO market has also created ripe conditions for corporate buyers to target high potential venture-backed companies that are currently unable to attract additional venture funding. While earnings dilution remains a pressing concern for public acquirers, some of these targets may be near profitability or are simply too strategically attractive to overlook.
But is it also a bad time to sell?
To be sure, the substantial decline in public equity prices has dropped the value of potential targets, both public and private. The price-earnings (P/E) ratio for the S&P 500 now stands at 15.2–down significantly from a recent high of 27.5 in mid-2007–and close to the long-term average of 15.7. With P/E multiples (at least for now) near the historical average, it may seem strange to say, but this may be an equally good time to sell as it is to buy. Prices seem low only when compared to their recently abnormal highs.
For companies that offer compelling strategic value to a particular acquirer and are able to hold their own in this economy, now may in fact be an advantageous time to entertain an acquisition offer. The challenge will be rustling credible alternative bidders.
Plenty of prey, fewer hunters
Continuing a trend that began in mid-2007, corporate buyers currently face substantially less competition from private equity groups who are more reliant on credit and distracted by portfolio-company concerns. While private equity groups have large amounts of committed capital to invest, with credit restricted, they are unable to compete with strategic buyers who have cash and tappable credit lines.
To mitigate risk, most targets will be relatively modest in size and carefully selected to achieve clearly defined strategic objectives. This rifle-shot approach will often leave prospective sellers without obvious prospects for competitive bidding. Ensuring the best possible terms in a single-bidder sale process, while difficult in normal conditions, will be particularly challenging in today’s environment.
Sellers must control the discussion
So what are some best practices for targets confronted with a single, unsolicited offer? The first critical decision is how much and what information to share. At my firm, we commonly see two similar types of mistakes here. There is the “tell-them-as-little-as-possible-until-we-know-they-are-real” approach, and its variant, “let’s-just-give-them-last-year’s-financials-to-get-a-ballpark-offer” approach.
Both approaches fail to provide the bidder with information sufficient to develop an initial valuation that will hold up through due diligence. Moreover, both approaches fail to tell the company’s story in the most advantageous light, neglecting to explain historical trends (whether favorable or unfavorable), growth opportunities, and potential benefits to the acquirer. The key lesson is not to elicit a value indication until the target has been properly positioned; for once a value has been established it is difficult to move a bidder substantially upwards.
Create a sense of competition
Equally critical is the need to introduce a credible threat of competition-even if it is never intended to be implemented. One way to induce fear of competition is to prepare formal offering documents and deliver them marked “draft” to the sole bidder. The message cannot be missed–you are prepared to open the process to other bidders at any time if necessary.
These days, even if there is only one bidder, it is often advisable to use an electronic data room that provides online access to the seller’s business documents. The price for electronic data rooms has dropped considerably and they help facilitate due diligence even if there is only a single bidder. But they also send a message that the seller can readily turn on a broader process if so compelled.
Even if the seller believes that the single bidder is the most likely buyer, it is always a good idea to evaluate alternative acquirers. Sellers who are in preemptive discussions with the “obvious” buyer are sometimes reluctant to approach other potential acquirers. However, it is often the case that the obvious buyer–often a direct competitor–is unwilling to pay as much as a buyer seeking to expand into an adjacent market segment.
Finally, while some sellers are tempted to manage a single-bidder process on their own, retaining an investment advisor introduces a heightened threat of competition. An investment banker (and yes, I am one, but there are many to choose from) can also provide an independent assessment of current market value as a foil to the single bidder’s value. Because a single-bidder process is more streamlined, investment bankers are usually willing to adjust their fees accordingly.
The bottom line? In tough economic times, employing these best practices will enable sellers to more effectively manage the single-bidder process and improve their odds of obtaining full value in a down economy.